Population growth and job growth are two of the easier to understand metrics we look at when analyzing a market. These are high-level indicators and certainly have their value. When we want to get more granular and dive deeper into the demand for an area specific to apartments, we look at net absorption. 

What is Net Absorption?

Net absorption is a key metric used in the real estate industry to gauge the demand for apartments in a specific area over a given period. It represents the difference between the number of rented units and the number of vacated units during that time frame. In simple terms, net absorption helps us understand whether more apartments are being rented (positive net absorption) or vacated (negative net absorption).

To better comprehend the apartment market using net absorption metrics, we need to follow these steps:

1. Research the Data:

Start by gathering data on net absorption from reliable sources. This data may be available from local real estate agencies, government reports, or reputable websites. There are also data aggregation companies that compile this sort of info into periodic reports (i.e., CoStar and RealPage). Look for data over the past few years to identify trends and patterns.

2. Calculate Net Absorption:

To calculate net absorption, you'll need two crucial pieces of information for a given period: the number of newly rented units, and the number of units that have been vacated. Now just subtract the number of vacated units from the newly rented units to obtain the net absorption figure.

3. Understand Positive and Negative Net Absorption:

Positive net absorption indicates a healthy market where demand is outpacing supply. This scenario often leads to increased rental rates and suggests a competitive market for renters. Conversely, negative net absorption indicates that there are more vacated units than newly rented ones, indicating a weaker demand relative to supply.

4. Compare with Historical Data:

Once you have calculated the net absorption figure, compare it with historical data. This helps you identify long-term trends in the market. For example, consistent positive net absorption may indicate a growing and stable market, while erratic fluctuations might suggest a volatile market.

Looking at the picture below of a CoStar report from one of our favorite submarkets, we can see that the 12-month absorption is currently at a positive 454 with a historical average of positive 235 and a forecasted average of positive 799. These are good signs and point to a healthy demand for apartment renters despite a relatively high amount of newly built units being delivered.

Conversely, the CoStar market report below shows a negative 12-month absorption at -1,859, with a historical average of positive 407 and a forecasted average of positive 206. This could indicate an oversupply of newly built apartments or a slowing of renters moving to the area. The CoStar report sums up the overall effects of negative net absorption on this particular market quite nicely: “This supply and demand imbalance drove the metro-wide vacancy rate to 8.4% and slowed rent growth to 1.8%.”

Remember that net absorption is just one metric. To get a comprehensive understanding of the apartment market, analyze other factors such as population growth, employment rates, and economic indicators. These factors influence housing demand and can help you make a more informed decision.

By monitoring net absorption over time, you can recognize patterns and trends in the apartment market. This information will help you predict potential fluctuations in rental prices and make informed decisions about what markets in which to invest.

As a potential investor, understanding net absorption will enable you to assess the health of the apartment market in your area of interest. Positive net absorption may present a good opportunity to invest in a property, while negative net absorption may indicate a need for caution. You will better be able to identify which markets are emerging and which are oversaturated. Remember that real estate markets can be complex, but by adding this metric to your analysis you will be better equipped to make informed decisions on where to focus your efforts.

Below is a list of the top 15 markets with positive net absorption for the first half of 2023. We are happy to see all our favorite markets made the list!

On behalf of all of us at Guardian Multifamily, we appreciate you taking the time to further your education and we hope we provided value. Do you have questions about syndications, analyzing apartment markets, or anything else real estate related? We’d love to hear from you!